Tech Bucks the Trend

From the Desk of Ian Culley @IanCulley

Investors are bidding up growth names.

Perhaps it comes as a surprise, given elevated interest rates.

It did catch me off guard, but it hasn’t stopped me from taking advantage of the developing trend.

I’m not the only one noting the peculiar divergence between rates and tech stocks.

Todd Gordon cited a persistent rise in rates as a potential headwind for the growth trade during Friday’s episode of The Morning Show.

(If you haven’t watched his segment, check it out here.)

One of the charts he shared on the subject has also been on my radar…

Here’s the overlay chart of the US 10-year yield and the Small-Cap Value ETF (IWO) relative to the  Small-Cap Growth ETF (IWN):

The rise in the 10-year yield has driven the outperformance of small-cap value, and cyclical assets more broadly, since early 2021.

That relationship has steadily deteriorated this year, highlighted by the negative correlation in the lower pane.

The IWO/IWN ratio makes an excellent addition to the long list of intermarket signals suggesting lower rates.

Nevertheless, rates refuse to roll over.

That’s information – we’re still in a rising-rate environment.

Just as IWO/IWN challenging fresh 52-week lows provides information, investors are favoring growth stocks!

I prefer to focus on the available information instead of forcing intermarket relationships that are obviously out of sync.

The market doesn’t care about me or my opinions, nor should it.

These two charts will eventually resolve in the same direction. When? I have no idea. 

More importantly, rates and growth stocks are ready to head higher in tandem – at least for now.

Stay tuned!

Countdown to FOMC

The market is pricing in a 25-basis-point hike next month following the recent decision to pause.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of June 22, 2023.

Thanks for reading. As always, be sure to download this week’s Bond Report!

And let us know what you think.